In a time when market volatility and equity preservation is of utmost importance, determining the correct number of shares to buy, or “position sizing”, is key to maximizing returns and minimizing risk.

The common investor generally doesn’t spend much time thinking about how many shares to buy or how significant of a position to take. Instead, most investors use a common methodology of trading the same number of shares each time, which usually translates to a specific dollar amount. Other, more sophisticated investors, opt to allocate a certain percentage of their portfolio value to a specific position. Following this train of thought, a new position in a portfolio of $100,000 would transcribe either a $10,000, or 10%, investment or a usual position of 50 shares.

Although these methods may work for some, using the volatility of a specific portfolio is likely to be the most effective decision tool. Measuring a portfolio’s overall volatility enables an investor to decide on what percentage of that portfolio he is willing to risk losing on the new position. This methodology is better explained through the following example. Read More…

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By Chuck LeBeau, Director of Analytics, SmartStops.net (originally published in April 2009)

Modern portfolio theory is based on the premise that volatility is the best definition of risk. However, like many popular assumptions, that may not be entirely true. The equity markets of 2008 and 2009 took a rollercoaster ride and were overshadowed with unprecedented volatility which forced many to re-evaluate the industry and assess the changes that have come forth over the past years.

Although the basic fundamentals and principles of investing have remained the same, and successful investors continue to be the ones who can balance the risk and reward trade-off, it is now apparent that investors can’t control the reward side and that controlling the risk side is the key to preserving equity. In fact, a survey conducted by Charles Schwab indicated that 45% of investors would choose an advisor who provides products which protect them against market risks over one that doesn’t. This article will demonstrate how increased volatility, as measured by Beta, can be harnessed to provide higher returns without a commensurate increase in risk Read More…

SmartStops commentary: There are critics of his calls, but Roubini in July 2006 predicted a “catastrophic” global financial meltdown that central bankers would be unable to prevent. The collapse of Lehman Brothers Holdings Inc. in 2008 sparked turmoil that led to the worst financial crisis since the 1930s. Of course predicting the markets future is challenging to say the least, with so many factors at play. Its why investor’s methodology must evolve to have protection ready for themselves at all times. You can’t survive our markets any longer by deploying a buy and hold methodolgy.

‘Perfect Storm’ warning for stocks

A “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy, New York University professor Nouriel Roubini said.

There’s a one-in-three chance the factors will combine to stunt growth from 2013, Roubini said in a June 11 interview in Singapore. Other possible outcomes are “anemic but OK” global growth or an “optimistic” scenario in which the expansion improves.

“There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”

Elevated U.S. unemployment, a surge in oil and food prices, rising interest rates in Asia and trade disruption from Japan’s record earthquake threaten to sap the world economy. Stocks worldwide have lost more than $3.3 trillion since the beginning of May, and Roubini said financial markets by the middle of next year could start worrying about a convergence of risks in 2013.

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SmartStops wants to remind you that it is important to stay protected in the markets. There’s alot going on within the underlying infrastructure that you may not realize.

from inside flap of The Vega Factor: Oil Volatility and the Next Global Crisis by Kent Moors

“There is a sleeping dragon at the heart of the financial system. Soon the beast will awake and rear its terrible head, and we will look back on the days of the subprime disaster with nostalgia. In this riveting book by oil industry expert Kent Moors, you will meet the dragon he refers to as oil vega, and you’ll discover why it poses such a grave threat to world economic and political stability.”

“Those familiar with the options and currency markets will recognize vega as the term traders use to denote the rate of price volatility. Expanding upon that traditional usage, Moors coined the expression oil vega to describe the dramatic increase of price volatility seen in the oil markets over the past several years. In The Vega Factor, he describes how, contrary to popular belief, the current environment of runaway volatility in the markets is not the work of diminishing reserves, manipulation by oil producing nations, or increased competition among nations. Rather, it is a result of a structural flaw in the trading system itself.

Last week was very rocky for clothing retailers, Ralph Lauren, Aeropostale and almost cataclysmic for the Gap.

The Gap (GPS), which is the 800 pound gorilla in the clothing retail space, presented poor earnings and cut its outlook for the rest of the year. During their conference call, it became clear that the retailer has been having a hard time managing the margin squeeze caused by the spike in
commodity prices, particularly cotton. In addition the company experienced weaker sales, which has been only exacerbated by the high cost of oil. The stock traded down $4.07 to $19.22. The stock is trading below its 55 and 210 day moving averages and it is unlikely to break this new downtrend without a significant catalyst from the larger markets. The Smartstops.net short-term stop is at $18.61 and the long-term stop is at $17.84.

News of the Gap, was compounded by the poor results of Aeropostale (ARO). The teen retailer’s guidance for the quarter fell well short of market expectations amid dropping sales and the afore mentioned rise in rawmaterial costs. On Friday ARO was down $3.04 at $18.30. It is well below its 55 and 210 day moving averages. And will more than likely need a significant market catalyst for that to change in the near term. Smartstops.net has the short-term stop at $16.40 and the long-term stop is at $15.68

This news created waves in the market as other apparel companies, also affected by the same rise in cotton prices saw their stock plummet as much as 5%. Polo Ralph Lauren (RL) which has earnings on May 25th dropped precipitously, but is being supported above its 55day moving average. SmartStops has the short-term stop at $126.17 and the long-term stop at $123.51.

Fortunately this news has not caused the SPDR S&P Retail ETF (XRT), to weaken significantly. It is still being supported by the 55 day moving average and is well above its 210 day moving average. SmartStops has the short-term stop of the ETF at $51.60 and the long-term stop at $50.74

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Both macro and microeconomic forces suggest that the global water sector is destined to see exponential growth paving the path to opportunity for the PowerShares Water Resources (PHO), the PowerShares Global Water (PIO) and the Guggenheim S&P Global Water (CGW).

From a macro perspective, incomes in developing nations are expected to rise and populations around the world are expected to continue to expand pushing up demand for water. In fact, at current growth rates, it is expected that demand for water will grow by nearly 6 percent annually. This growth is expected to be most prevalent in emerging Asia, where India is expected to see its water demand more than double and China’s to rise by more than 30 percent over the next 20 years. Read More…

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As the US government has resorted to excessive spending measures to keep the economy from completely crumbling, many investors suggest that inflation is inevitable and could even prevail in the coming months.

Current economic data suggest that inflation is running lower than expected; however there are numerous reasons to think that inflation will eventually be inevitable. Some of these reasons include the Federal Reserve’s implementation of QE2, which launched in early November, the increases in money supply in the earlier stages of the Great Recession to ignite a spark in the US economy and rising commodity prices are likely to take their toll on the consumer price index (CPI). In fact, rising prices have already started to emerge, evident through the recent rise in energy prices (i.e. crude oil and gasoline), food prices (i.e. wheat, sugar, coffee and soybeans) and airline tickets. Read More…